Everything you need to know about service charges

Service charges are one of the ‘hidden costs’ of buying and, as developers increasingly install a whole host of extras in their new developments, costs are rising and must be an important consideration when buying

Who pays service charges?
Service charges aren’t restricted to newbuilds and don’t just apply to leasehold properties. Sometimes a service charge is payable on freehold properties, even houses, where there are shared services, or communal areas such as roads or gardens. Developers of newbuild homes typically give the figures as an annual service charge, with fees collected regularly throughout the year, but in resales, or smaller buildings, this can vary. Some buildings don’t collect regular service charge amounts; instead, the owners run the building on an ‘ad hoc’ basis, meaning that each owner is expected to pay out money as and when works need to be done, which can result in large bills, even though you share joint responsibility with other owners. Some buildings, especially those which are larger, or have a professional management company in place, will usually collect service charges on a regular basis throughout the year from the owners. The money is then used to pay for the running costs of the building.

New versus old buildings and the impact on service charges
Today’s new developments increasingly feature a wide range of amenities, from gyms and pools to cinema rooms and communal lounges. You might find that you save on private gym membership, but buyers must factor in rising service charges. Recent research by landlord insurance provider, Direct Line for Business, found that the average annual property service charge in the UK is now £1,863 and, staggeringly, service charges for newbuilds are 96% higher than older properties, with owners paying on average £2,777 per year. When buying your first home, you may find a service charge that you think is reasonable, but beware that costs can rise. The insurance provider found that a third of management companies have increased service charges in the last two years.

Wide variation of costs
Costs can vary widely, depending on the age of building and amenities involved. Direct Line for Business’ research discovered wide variations across new London developments. They found that a newbuild development coming on to the market in Croydon in 2016 will see homeowners paying £1.55 per square foot in service charges, while a development in Lambeth coming on to the market in 2017 is charging four and a half times more at £7 per square foot. In some luxury new developments, properties can have annual service charges which can be anything up to around £16 per square foot. With developments increasingly selling an ‘all-inclusive lifestyle’, especially at the top end of the market, buyers are paying for 24-hour concierges and even weekly flower deliveries for communal areas – costs which are not to be underestimated.

Sink funds
In a typical Victorian building, consisting of four or five flats, an annual service charge would currently be around £1,200 per resident, with most of that going towards buildings insurance.

Service charges usually cover repairs to communal areas of a development, such as windows, drainage and the roof. They may also be used to establish a sinking fund for major renovations. In some cases, they are also used to pay for shared services, such as gardeners, landscapers, concierge services or cleaners. A ‘sinking fund’ is essentially a savings pot for the building, where a proportion of the service charge is paid into a separate account which builds up over time and then, when larger works need to be carried out, there is already money available to pay, or go towards paying, the full cost. This can be a less painful alternative to owners being hit with a large bill all in one go.

Things to watch out for
When buying your first home, always look at comparable properties to assess whether the charges are artificially high. Take time to read the lease carefully and ensure the development is being, or will be managed, by a competent agent. The agent should be ARMA accredited and preferably also regulated by RICS. Check the finer details, like whether water consumption is included in the service charge, or whether it is billed direct by the water authority. Also, check communal heating arrangements to see whether maintenance is included in the service charge.